Sometimes, we’ll define a set of INTERMEDIATE outcomes so that we can define our actions more precisely. In general, the simpler the outcome, the simpler the actions required. And sometimes, a FINAL outcome is too amorphic or too complex to attack head on. For example, we might want to become rich and powerful. That would be our super-objective. We’ll NEVER get there unless we define a set of intermediate objectives, such as getting rich requires we make money. Making money requires we have something to sell – a product or an ability. Being able to sell it means first acquiring it. Acquiring it requires a set of skills, which require homework, and so on down the line.

Now, most financial trading strategies have 2 aims: defining when to enter a trade and when to exit it so as to monetize a trend or a reversal to their maximum. Considering there are literally hundreds of indicators and an infinite number of combinations of them, you’ll need to experiment until you find which you’re most comfortable with. We’ll look at four very briefly so you get the idea.

The simplest strategy I know is the Trend strategy, and here we’re simply taking advantage of retracements. What we’re looking for is a candlestick formation that indicates that’s over and we’re back to the major trend. We use engulfing formations, where our retracement candles, bearish in this case, are followed by a bull candle that engulfs all 3. We can enter as the next candle begins. Here we’ll be using a trailing stop loss. We first place it at a fifth the previous bull candle and correct it upwards with each new candle manually. As you can see that would trigger on this bear candle up here, closing the position.

Another simple strategy is the Channel strategy,. Here’ we’re looking for signs of a reversal breakout. Again, we’re talking about a pennant up here, which is our first hint. Once the breakout begins, this second bear candle here, we’d open our position at halfway down the length of the previous candle, putting our stop loss at the same distance in the other direction. Again, we can correct that stop loss downward but carefully. We wouldn’t want our position to close on this bullish wick.

Now let’s try two with some technical indicators. We’ll start with the fishing line strategy, which uses Bollinger bands. For a call, we look for 2 candles that close below the bottom band. Now, the price is going to be pulled in, but will that be for a trend or a double bottom. Obviously, we want the first. We know that’s going to happen if the price crosses the moving average into the upper band, at which point we buy. Set your take profit at the top band and your stop loss at the bottom of those errant candles back here.

OK. That was fairly straightforward, but we DO have more complex strategies that use two or more indicators. The Fractal strategy is just one. You’ll remember that fractals are patterns that repeat themselves on several levels. Through several time scales, for example. In finance we use them to identify our next trend. We’ll be using our fractals indicator and an alligator indicator, both created by Bill Williams, a well-known author and trader. Now, the fractals indicator simply shows us where patterns are repeating themselves – bullish above a down arrow and bearish above an up arrow. And the patterns are simply 5 candles – the middle one forming either the apex or the floor. The alligator is a set of 3 moving averages that are moved into the future… that’s sideways for us. We begin by looking for crossovers of the 3 moving averages alongside a pair of fractals – that’s one down and one up – which is NARROWER than the preceding pair. That’s our signal. In this case, we’re talking about a buy that we open at the resistance of our pattern, which will now become support and put our stop loss at the same distance below the pattern’s support.

So that’s our example of a more complex strategy that looks for 2 signs of a pattern reversal and how to play it out. Again – there are simpler ones and more complex ones. The more you play around with technical indicators, the more comfortable you’ll become. The idea is to create a kind of dialogue with a small set of them – the ones you find easiest to understand. Eventually you’ll discover that HOW they play out is almost as fascinating as how you use them to make money.